The UK faces a dilemma. In the wake of Covid and amid a cost-of-living crisis, how do we boost our economy, support business growth, and regenerate the nation?
And, how can we get more money in the pocket of the average Brit in the years to come at a time when nearly nine out of ten defined contribution (DC) scheme members expect a shortfall in retirement income?
I believe the answer lies in our vast pension ecosystem.
This week, the chief executives of organisations that manage many of the UK’s largest DC pension schemes signed the Mansion House Compact, committing them to allocate at least 5 per cent of DC assets under administration to unlisted equities by 2030, which could unlock over £50billion by the end of the decade.
The signatories – Aviva, Scottish Widows, L&G, Aegon, Phoenix, Nest, Smart Pensions, M&G and Mercer – represent around two-thirds of the DC market.
They’ll invest via existing investment vehicles or new ones. And that could include a vehicle such as the Future Growth Fund, an idea I’ve championed during my mayoralty.
With several top universities, the UK is one of the world’s most innovative nations. And innovation has been the main driver of long-term economic growth in this country.
Yet, while we are good at helping start-ups off the ground, the UK lacks the deep pools of later-stage venture capital they need to accelerate – forcing them to head to overseas capital providers.
We’ve seen high-profile tech businesses that started in the UK shunning a listing on the London Stock Exchange in favour of New York.
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Though the seeds of innovation are sown here, the rewards are therefore reaped elsewhere.
I warned about this at the Lord Mayor’s banquet when I took office and suggested pension contributions should fill the funding gap.
Overseas pension funds are investing 16 times more than domestic pension funds in British venture capital and private equity.
At the Chancellor’s request we’ve been building a consensus on the idea of DC pension funds allocating more to unlisted equities.
The Compact, over time, will ensure high-growth companies in sectors like fintech and biotech can stay and scale in the UK, support the development of sustainable infrastructure in areas that feel left behind, and improve retirement incomes.
A substantial fund could allow DC funds to share the risks and the benefits, with the economies of scale pushing down costs.
I understand why what we’re doing has caused some to pause for thought. But the asset allocation of default funds for the last 15 years is no longer fit for purpose, and savers need more exposure to real assets.
A sensible aversion to excessive risk-taking has, arguably, developed into a full-blown allergy to anything remotely risky. And innovative firms and pension savers are suffering.
These funds will be invested by independent managers to deliver the best returns for savers by backing unlisted companies in the growth economy.
Nothing changes if nothing changes. If we fail to take this relatively modest step, we’ll be shooting ourselves in the foot.
While we’ve been working with the Chancellor, I am delighted the shadow Chancellor, Rachel Reeves, has supported plans for reform. Because whoever wins the next election will need to carry this work forward.
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